Should India’s outsourcers fear China?

October 6, 2010

In the span of a just couple of decades, China has managed to wipe out much of the manufacturing base of the West (and the USA in particular) and now Indian outsourcers are asking the question: Will we be next? On the surface, Indian outsourcers need to be looking in the rear view mirror. After all, a recent article in the Financial Times noted that:

Beijing has a declared goal of creating 10 internationally competitive outsourcing hubs around the country, encouraging 100 multinational companies to outsource to China and for developing 1,000 Chinese outsourcing services vendors who can compete in the global market.

Chinese outsourcers are increasingly picking up orders in the USA and European markets – the traditional strongholds for Indian outsourcers.

In 2009, all of the top 10 Chinese outsourcing services vendors saw their revenues from US and European client rise. In fact and in some cases, this revenue outgrew the portion of their business derived from Japanese and South Korean markets where they initially started offering outsourcing services.

In June 2009, HiSoft, the third-largest Chinese offshore vendor, went public on Nasdaq and they are currently servicing a few global clients such as AIG, Microsoft and Citigroup.

Moreover, a KPMG survey (“Shared Services and Outsourcing in China“) which polled 286 executives and was released last July found that companies in the Asia-Pacific region prefer China as an outsourcing destination – namely due to low costs and language capabilities. In fact, nearly 40% of the firms surveyed by KPMG in China, Hong Kong, Japan, Malaysia, Singapore and certain other parts of Asia indicated that their outsourcing service provider is located in China while 30% indicated that their outsourcing provider was in India. In addition, 42% of companies surveyed indicated that they have at least one captive center in China followed 30% for Singapore and another 25% for India.

On the other hand, the Financial Times had also pointed out that:

China’s IT services exports were only valued at US$9.6 billion last year while India’s were valued at US$49.7 billion.

Neusoft, the largest Chinese outsourcing player, reported US$618 million in revenues for 2009 – less than one-tenth of Tata Consultancy’s revenues of US$6.5 billion (for the financial year ended March 31).

Not one Chinese outsourcing group even approaches 10% of TCS’s headcount of 160,000.

While China is now a mature offshore services destination, its mainly a destination for regional support with more than three-fourths of its offshore services exports going to Japan, Korea and Southeast Asia.

China lacks certain capabilities to play a meaningful support role for clients in North America and Europe. Hence, most global companies who are utilizing China do so in order to support their operations in Asia.

China is severely limited by a lack of experienced project managers who have the skills to interact with clients in both North America and Europe. Moreover, a lack of adequate English skills and insufficient cultural affinity or familiarity further limits China’s ability to offer large scale offshore services to the West.

Data privacy and intellectual property protection concerns continue to exist and these concerns constrain the types of services that buyers are comfortable obtaining from China or Chinese outsourcers.

Outsourcers in China are building scale but the pace of growth for pure offshore outsourcing services remains small. Moreover, many service providers in China are merely leveraging their centers in China to support specific modules for delivery centers located in India or elsewhere.

Hence and given the above facts and findings, we want to ask you our readers what you think: Should India and Indian outsourcers really fear China? Or is the fear of China doing to India what it did to the West’s manufacturing base really overblown?